Fed decision in September was a coin toss as interest rate hikes become more likely

Kevin Warsh’s keynote speech at the central bank’s annual symposium in Jackson Hole, Wyoming, changed investors’ outlook for a rate hike in September after the Fed chairman said he would work to combat inflation.

Traders at prediction market platform Kalsi currently believe there is a 48% chance the Fed will raise interest rates by 25 basis points. Before Warsh’s speech, the probability that the central bank would maintain the status quo in September was nearly 70%. ‘

Traders in federal funds futures now see a nearly 56% chance of a quarter-point rate hike in September, according to CME’s FedWatch tool. Also, in the polymarket, speculators indicated a 49% chance that the Fed would raise interest rates.

After the Fed’s July meeting, investors were fairly confident that rates would rise in September, especially considering that three members of the Federal Open Market Committee did not agree with the majority’s decision to keep rates unchanged. Rather, these three members argued that interest rates needed to be raised in response to rising inflation.

But the odds of a September interest rate hike have declined over the past month after weaker-than-expected jobs data showed the U.S. lost jobs in July and that inflation, while still above the Fed’s 2% target, has slowed.

Warsh directly addressed these data reports in his speech on Friday, but warned that the central bank needed to see more information. “Although this summer’s (inflation) numbers were better than expected, we cannot say that the underlying trend has improved meaningfully,” Warsh said.

Mr. Warsh addressed the situation more directly: “We must have confidence that underlying inflation is moving clearly and sufficiently fast toward our goals. If not, we have a job to do. That is our job, our mission, our obligation.”

Short-term yields rose in response, with the two-year Treasury yield, which roughly follows the Fed’s short-term interest rate decisions, at its highest level since late July.

The Fed’s interest rate decision will be made on September 16th.

Disclosure: CNBC and Kalsi have a commercial relationship that includes customer acquisition and minority ownership.